Peter Wong Answers Everything You Want To Know About Hong Kong
by Peter Wong, audio of this interview available here
Peter Wong is the Executive Director of The Lion Rock Institute. He is a columnist for The Hong Kong Economic Journal. Besides giving commentaries in various TV stations in Greater China, he is currently a presenter at Hong Kong government’s RTHK radio and also speaks at private radio stations such as Metro Radio and DBC.
II: About Lion Rock
III: Hong Kong’s Freedom
IV: HK Falling for “Peer” Pressure
V: HK Benefited from Benign Neglect
VI: The Future
VII: Pegging HK$ to US$, Terrifying
VIII: Prosperity Follows Freedom
IX: Taxes in HK
X: HK During Downturns
XI: Pessimistic But Worse Elsewhere
XII: Call To Action
Part I: Introduction
Jerry Bowyer: Good afternoon and welcome to the program, you’re listening to American Entrepreneur Radio, but we aren’t really talking about American entrepreneurship at the moment; we’re talking about Asian entrepreneurship. As you know, if you’re a listener to this program, when I’m here at this microphone I like to talk to you about the rest of the world. The United States was for many generations the freest country in the world and therefore undoubtedly the best place to invest, but it isn’t the freest nation in the world anymore and it hasn’t been for some time now, actually. As a lot of the world has moved towards freedom, the United States has moved away from freedom, which means you as an entrepreneur or investor or a business manager need to take that into account when you’re making decisions about where to start businesses, where to expand businesses and what businesses to invest in. So, I’ve asked Peter Wong to be with us. Peter is with the Lion Rock Institute which is the leading free-market educational foundation — think-tank, is what we call them, in the United States — in Hong Kong, which is by a number of measures the nation with the freest economy in the world. Peter, welcome to American Entrepreneur radio.
Part II: About Lion Rock
Jerry Bowyer: It is great to have you. I have been reading the material from the Lion Rock Institute — by the way, what’s that named after? The ‘Lion Rock’, what does that refer to?
Peter Wong: There are three parts within Hong Kong; the Island, Kowloon and the New Territories. Lion Rock lies between Kowloon and the New Territories. Around 30 years ago, we had an immigration policy called the ‘touch base’ system — like baseball. So the refugees that came from the North, when they swam and tried to get into Hong Kong, would first land in the New Territories, the most northern part of Hong Kong. But they wouldn’t get residency unless they crossed Lion Rock and entered the city center, or CBD, or downtown, whatever you may call it.
Jerry Bowyer: Then they are free?
Peter Wong: Yes, so that has a very strong symbolic meaning that after you pass Lion Rock, you get freedom and you get away from the control of the State. Also, because after the refugees entered Hong Kong and got residency, many of them resided around the base of Lion Rock and that’s how we know they worked hard and didn’t look for welfare from the State. The only thing they were looking for at that time was to be left alone — they didn’t want the State to take care of their welfare. And so, because of this, people just worked hard at that time and the economic miracle of Hong Kong was built upon that. People didn’t look for welfare; they just wanted to make a living by themselves.
Jerry Bowyer: So, Lion Rock is in some sense the symbolic equivalent of Alice Island and the Statue of Liberty in the United States — it’s where the huddled masses yearning to breathe free come and first touch.
Part III: Hong Kong’s Freedom
Jerry Bowyer: Fascinating. Thank you for telling me that, it is actually quite a beautiful image. So, they obviously get a lot freer when they come there; do you agree that Hong Kong is the freest economy in the world? I mean, I think the Index of Economic Freedom from the Heritage Foundation says it is, and I think the Fraser Institute Economic Freedom of the World says the same thing, is my memory right in that? Do you agree with that?
Peter Wong: Yes.
Jerry Bowyer: Ok.
Peter Wong: I believe we are still the freest given the rest of the world. The governments are taking away freedom from the people, especially after the Financial Crisis back in 2008, so I believe that is why we are still the top — because others are doing worse. You will still witness the government in Hong Kong intervening into our life more, but when you compare us to the rest of the world there is still a ‘sanity’ in our government, so we are still on the top in this sense.
Part IV: HK Falling for “Peer” Pressure
Jerry Bowyer: I see. We are grading on a curve, in essence … in a ranking system you are a very free country but what you’re saying is — not free enough. Or not as free as you’d like to be.
Peter Wong: We could have done better. There is a fallacy here in Hong Kong — the government officials often say ‘Oh, look at the West and their advanced economies’. For example, because they all have minimum wage, we too should have one…because they have anti-trust, or a competition law — which is what they call it in Europe — we should also have one, we should have a law to regulate competition. But very often the Lion Rock Institute will come out and say; ‘Yes, the West used to be great. But look at Europe, especially Europe. Do you really want to take their policies and implement them in Hong Kong?’ There are things like this going on in Hong Kong.
Part V: HK Benefited from Benign Neglect
Jerry Bowyer: Why is Hong Kong so much freer than the West? I mean, Hong Kong was for a long time a British colony but it seems to have been freer than Britain was when it was a colony of Britain … what is the historical basis for this unusual commitment to a high level of freedom?
Peter Wong: Hong Kong — it is blessed, or it was blessed, to be an economy at a time where the colonists did not really care about the welfare of the local people. So the reason we did not end up as a welfare state was because of the colonists here, because they didn’t care about votes or welfare at that time. So when you think about the history of Hong Kong — we were considered a trading port, or a stepping stone for the British people to do trade with China at that time. Many of those British people did not have any long term plans for Hong Kong.
Jerry Bowyer: So you are free through benign neglect. *laughs*
Part VI: The Future
Jerry Bowyer: So they didn’t try to help you — Fascinating. So Peter, you made a point that Hong Kong is the freest nation in the world according to most measures, economically freest according to most measures, but that is partly because most of the world is moving away from freedom. Where are you trending right now? As of the state of things today, is Hong Kong becoming more free, less free or is it a neutral movement on the issue of economic freedom?
Peter Wong: We are getting less free. It is just like Central banks — I don’t know if you are a fan of the gold standard or not, but when one central bank starts printing money, especially like the Fed, when the Fed is printing money then the other central banks will follow; the only difference is, maybe Bundesbank may print the least. So Hong Kong, to me, is still the freest economy in the world; but for myself, I am looking for big nations, like the United States, getting back some sanity, because, after all, the United States is like the Sun, and we are all like small planets around it — and at the end of the day, we will be destroyed if the Sun runs into a self-destruction process.
Jerry Bowyer: That is a good analogy — let’s continue and run with that analogy. It’s hard for the world to prosper if the United States is not prospering, and the United States doesn’t prosper well unless it’s economically free. So there is a dependency, not like welfare dependency, but there is an interdependency factor. So if you are a very free country, being a very free country does not shield you fully from the effects of bad central bank policy, boom and bust cycles in other nations, because you still export to us and there’s still services … freedom maybe makes you more adaptable in a global recession but even very free countries still suffer from global recessions if they’re small.
Peter Wong: Exactly. Just look at Switzerland. When the Euro is getting into a self-destruction process the Swiss National Bank itself is getting away from the disaster by pegging their currency, the Swiss Franc, to the Euro! Also, big nations like the United States or Germany in Europe, when they become uncompetitive as a result of certain government policies, such as high taxes, they will always like to control other jurisdictions’ tax policy — they have always looked to the Irish people and the Irish government to increase corporate tax.
Jerry Bowyer: They call it tax harmonization.
Peter Wong: Yes, because they are becoming uncompetitive, they would like other nations to become less competitive … so we will be influenced by the big nations.
Jerry Bowyer: I see, people refer to the idea ‘tax arbitrage’ so if everyone’s taxes are going up, your taxes can go up too because you can still be the ‘best’ and can have the lowest taxes. Let’s go into this a little bit further, you talk about the Sun and its planets revolving around the Sun … of course in the world it is almost like we have three Suns; there is an economy that largely circles around the United States, there is an economy that circles around Europe, mainly Germany, and in the East I think there is an economy that largely circulates around China. First of all, do you agree with that? It’s not really a single sun solar system right, isn’t it a three solar systems system? Or are you more dependent on the United States than you are on China?
Peter Wong: We are revolving around China. You are right, but I believe the balance is breaking down because the Sun right over Europe is falling down. *laughs*
Jerry Bowyer: So you are more dependent on China the more the West falters?
Peter Wong: Yes, since the handover, especially after China has joined the WTO — after all, it is now the second biggest economy and we are right next to it. We rely on China, but, the different solar systems also interact with each other. When the biggest solar system in the West is doing something insane like printing money, we will also be affected.
Part VII: Pegging HK$ to US$, Terrifying
Jerry Bowyer: I remember historically the Hong Kong Dollar is pegged to the US Dollar. Am I right in remembering that?
Peter Wong: Yes, we have been pegged to the US dollar since 1983. At that time, Paul Volcker was the Federal Chairman, and we did not expect it to end up becoming Ben Bernanke *laughs*. Remember, Paul Volcker raised the interest rate to double digits at that time to defend the purchasing power of the currency, but now you have quantitative easing in the States.
Jerry Bowyer: Yes, I am well aware of it … and terrified of it. It’s one of the reasons why I am doing so much programming about investing globally because of the decline of the dollar. So I suppose, to make the analogy a little more complicated, in terms of currency … you revolve around the Sun of the United States but in terms of trade relations, you are probably more revolving around the China growth story.
Part VIII: Prosperity Follows Freedom
Jerry Bowyer: Alright, good. One of the things I have been trying to understand, and at looking at Asia, because a lot of the really free countries in the world are in your part of the world — Hong Kong, Singapore, Taiwan — not quite as free as you and Singapore but still a fairly free country — Australia is a fairly free country, and in terms of the strategy of investing in freer countries — which is a strategy I pursue — one of the things I’m trying to understand is, how much of a risk there is if you’re revolving around countries that aren’t that free. If China, which is I think number 134 on the Index of Economic Freedom, is not as free, and therefore somewhat more vulnerable, then how much are you protected by being a free country, if say there is a downturn in the Chinese economy? Does freedom give you the agility to shield yourself from that interdependence: in part, very little, a lot … how much does freedom matter for a small country that’s doing a lot of trading with a big country that maybe isn’t so free?
Peter Wong: I believe that if China is going to collapse — because we all know about the bubble in China — I don’t think anyone could make himself entirely unaffected. But individually, as a free port, we can always move our money around the world … that’s really all we can do. When you mentioned China ranking in the Freedom Index 134th, people will wonder why China, given it is economically un free, has been doing so well economically in the past 30 years. China once was very un free 30 years ago, from a full communist state to a semi-free market, semi-planned economy. With this change, you gain a lot of dividend. So people don’t understand, they have a fallacy thinking China, because of the central government directing and planning how the economy moves, answers why the economy is doing well. But actually, that is incorrect, because, if you look to the past and see that the Chinese government returned some freedom to the people, they are just enjoying the dividend.
Jerry Bowyer: I think that is a good point and I’ve done a lot of work on looking at correlations between economic freedom and growth and what you’re pointing out is borne out by the data, that it is the change in the level of freedom that is the most powerful predictor of growth. It is not the level of freedom, but the change … if you are getting freer there is a strong probability that you will get more prosperous. If you’re the United States and you’re the 10th most free country in the world and you go from 10th to 12th, you will see strong economic contraction. So if you are moving towards freedom or away from freedom; it is a kind of a dynamic model as opposed to just a level and China has got a lot freer in the last 30 years and for that reason it has grown. I think you are right to critique Thomas Friedman and others who have talked about the China model as the model that we should go for. What we should go for in the China model is in the sense that China got a lot freer in the past 30 years and we’ve got to get a lot freer in the next 30 years.
Part IX: Taxes in HK
Jerry Bowyer: Peter, you were making the point that it was the trend towards freedom that probably matters more than how free you are and I want to come back to this idea of freedom allowing you to be more agile. Let’s just talk a little bit more about Hong Kong. Sort of the specifics. What’s the capital gains tax in Hong Kong?
Peter Wong: We do not have a capital gains tax.
Jerry Bowyer: Right, so zero percent.
Peter Wong: You are right.
Jerry Bowyer: Ok, so what’s the income tax? What’s the top income tax rate?
Peter Wong: The standard rate is 15%.
Jerry Bowyer: *laughs* wow. Do you happen to know the corporate tax rate?
Peter Wong: The corporate tax rate for companies is 16.5%.
Jerry Bowyer: Now this is just outstanding compared to a lot of the rest of the world, and it is very good compared to the United States where our capital gains tax is 15% and scheduled to go up to roughly 40% at the end of next year if nothing changes, where our top income tax rate is 35% and scheduled to go up to 40%, and where our top corporate rate is, I believe, 35%. So I can understand why capital would be flowing to Hong Kong. Does that capital help you grow more? I mean it’s obviously good for the businesses that can get those tax rates, but does it give you dynamism and growth? More capital means a lower cost of capital … which presumably means more economic growth?
Peter Wong: We have been witnessing a lot of hedge funds and banks moving their headquarters to Hong Kong. HSBC, which used to be a Hong Kong bank, because of the handover problem at the time they moved their headquarters to London in the UK. They are now considering moving back their head office to Hong Kong.
Part X: HK During Downturns
Jerry Bowyer: If you had a regional economic crisis, let’s say you had a downturn in China, that would hurt the Hong Kong economy in some sense because you are trade dependent. But on the other hand, it seems like there would be something that would help Hong Kong in that there would be a flight of capital to freer places … that when you have an economic downturn you usually have a move to the left in terms of economic policy; tax goes up, regulations go up, there is a tendency to blame the business sector for recessions which actually are caused by government monetary policy but the private sector is scapegoated … so do you get another effect, a kind of capital refugee effect when you have a financial crisis? Now we had a financial crisis in the United States in 2007-2008, we had highly regulated markets, and I assume that a lot of capital because of that moved from here to where you are. So I wonder if that freedom gives you more ability to be able to respond to downturns from larger economies?
Peter Wong: Well it is true that the housing prices here, when compared to the peak in early 2008, have risen by another 20-30%. So our housing prices have been making record highs, implying that yes, the capital flight phenomena is happening here. But it also depends on the crash outside Hong Kong, if the speed of the crash happens too quickly, then we wouldn’t benefit from the flight of capital. The problem is, for example, I am a fan of creative destruction. I believe that if the West in 2007-08 did not intervene in the market, then the economy of the West should have already rebounded, and Hong Kong wouldn’t have benefited from the flight of capital.
Jerry Bowyer: I see, if we had handled it wisely with minimum government intervention that would have been our gain and your loss, but instead we invoked on a process of what some people call ‘recessional revenge’ where we blamed Wall Street, we blamed banks, we blamed the private sector and so we were driving capital from here to where you are.
Peter Wong: Yes. When you kick the ‘can’ down the road, then you give the time to the wealthy people in the West so that they have the time to move capital to Hong Kong. But if you don’t intervene, and just let the economy plummet, then at a certain point there will be a rebound and we wouldn’t benefit from the flight of capital.
Jerry Bowyer: I see; so in terms of international tax competition, what is to the advantage of the free countries is a long process of reallocation of capital otherwise you might have sudden infusions of western capital leading to housing bubbles; you have the situation that Switzerland had, for example. So the disruption, the crisis, is not necessarily that good for you because if money is flying away from Europe towards Hong Kong that might cause a sudden appreciation of the Hong Kong dollar and all sorts of other problems for you.
Peter Wong: Well, just like housing prices. That then will lead to local people complaining that they cannot afford a house here and requesting for government intervention to control the housing price. It will affect us. Even though we somehow benefit from the flight of capital, there are always people that wouldn’t benefit and they would be affected by the flight of capital because of inflation, housing prices and other instances.
Part XI: Pessimistic But Worse Elsewhere
Jerry Bowyer: Yes. Well let’s take the possibility for the moment that this is not just an aberration, that in fact the United States is in a long term movement away from economic freedom and that Europe is continuing its long term movement away from economic freedom, and therefore it is not a temporary crisis. I am just running this scenario, I am not saying it’s my base case that it necessarily will happen, I suppose what happens is that free countries around the world adapt, you adapt to a world in which the American Sun is not shining as brightly as it used to and you start consuming more of your own production and the Asian economies become more consumer economies and because you are free and agile you adapt to that world and you move on, and you sort of ‘get over’ the need for the United States to be the Sun that shines on all of the other countries in the world. What do you think about that?
Peter Wong: Sometimes I feel very pessimistic. We have been working hard to export the Hong Kong model to the rest of the world, and we did it — about 30 years ago when Ronald Reagan took office, I think he listened to Milton Friedman and learned something from Hong Kong’s low tax policy.
Jerry Bowyer: Yes, Milton Friedman started off his special ‘Free to Choose’ in Hong Kong.
Peter Wong: I am worrying whether another Ronald Reagan would happen or reappear again.
Jerry Bowyer: Well, we can hope and we pray. As Reagan said; ‘trust, but verify’. I’ll believe I see another Reagan when he has cut the taxes and stabilized the dollar and all the rest of it. They all say, ‘I want to be Reagan’ and all of the Republicans say, ‘I’m the next Reagan’, but we will see. Well, the Hong Kong model, how well is this freedom model doing in the Asian region? I mean, you are moving a little away from freedom although still the freest country in the world, how about Singapore, how about Taiwan, Malaysia, Thailand — what is the general trend in those countries?
Peter Wong: The one thing you may want to notice is a common point about the jurisdiction you just mentioned. We are all small and open economies. Especially like Singapore, Dubai or Hong Kong, we are city states. And when you are a city state, sometimes you cannot behave like China did 30 years ago, closing your door and refusing to do business with other countries. Because you are so small, you have to rely on imports and exports, so because of that—city states are easier to remain free rather than big nations. For example, the United States can always shut their door and refuse to do businesses with the rest of the world with high tariffs and all sorts of policies, but the Americans can still survive.
Jerry Bowyer: I see, protectionism isn’t an option for you. It would be suicide. As Von Mises says in Omnipotent Government, ‘If you don’t have protectionism, it’s hard to have an interventionist state’, because if you’re in a global competition, then you have to be competitive. Protectionism goes together with internal intervention and a free flow of capital across borders goes together with a non-interventionist state internally, so one really implies the other.
Part XII: Call to Action
Jerry Bowyer: I see. Well fascinating. Peter I want to thank you for taking the time to speak with us. If someone is interested in the Lion Rock Institute and would like to know more about you, what could they do?
Peter Wong: Go to our website Lionrockinstitute.org. I always look forward to meeting and interacting with friends from abroad and as I said, I would always like to export the Hong Kong model. Though I know Hong Kong is a city state and maybe the United States may be too large to adopt everything from us, but perhaps the US can start out with one city first?
Jerry Bowyer: Right, just imagine a world where the United States was as free as Hong Kong. Imagine the prosperity on Planet Earth if the largest economy in the world had a 0% capital gains tax, a 15% top income tax rate and 16.5% corporate tax rate, the GDP of that, the prosperity — we would be curing cancer, having bases on the moon, human life spans would be growing around the world, it would just be a miracle of global prosperity, so I’m not going to give up on that dream that is something worth hoping for and worth praying for. Peter Wong, thank you for taking the time to speak to us.